Recent developments in bank regulation, enforcement, and litigation

Federal Reserve

On April 27 and 28, I had the privilege of attending the Texas Bankers Hall of Fame and Bank Executives’ & Directors’ Seminar hosted by Sam Houston State University. I would like to congratulate the five Hall of Fame honorees: B.A. Donelson, Jack Griggs, George Martinez, Milton McGee, Jr., and the late Milton Payne. I enjoyed hearing about all of their incredible accomplishments and contributions to community banking in Texas. Congratulations on the well-deserved recognition!

Just like last year, the Seminar provided valuable information to the community bankers in attendance. As an attorney representing community banks, I was most interested in the bank regulatory panel. The panel was again moderated by Sam Golden, formerly with the OCC and now a bank consultant with Alvarez & Marsal. The panelists were Bobby Davenport (Texas Department of Banking), Nathan Heizer (FDIC), Bernadette Hernandez (OCC), and Robert Triplett (Federal Reserve). For those who were not able to make it to the Seminar, I have recapped some of the most helpful information that the regulators shared:

Cybersecurity remains a top concern for banks and regulators, as data breaches pose substantial regulatory risk and high costs. As I have written in recent posts, banks must develop comprehensive cybersecurity policies to protect against data breaches and avoid adverse action from the regulators. Recent guidance and statements from the regulators provide additional insight into best practices in data security.

The Federal Reserve, FDIC, and OCC released their 2016 Shared National Credit Review and identified “growing credit risk in the oil and gas (O&G) portfolio” as an area of concern. Not surprisingly, the regulators pointed to the long-term decline in energy prices as the primary underlying cause of the heightened credit risk. This is consistent with the comments of Texas Department of Banking Commissioner Charles Cooper and the prudential regulators at the Sam Houston State Banking Seminar, identifying falling commodity prices as a risk to the financial stability of Texas banks.

On Thursday and Friday, I had the privilege of attending the Texas Bankers Hall of Fame Gala and the 20th Annual Bank Executives’ & Directors’ Seminar hosted by the Smith-Hutson Endowed Chair of Banking at Sam Houston State. First, I’d like to thank Sam Houston State (including Pam Thaler and my grandfather, Dr. Jim Bexley) for hosting these great events. Second, I want to congratulate the new inductees into the Texas Bankers Hall of Fame: Charlie Cheever, Bookman Peters, Stretch Smith, and Terry Tuggle. I don’t know them personally, but their introductions made clear that they have had a tremendous impact on the banking industry and their communities. I also want to congratulate my grandfather, Dr. Bexley, on his receipt of the first ever Texas Bankers Association Lifetime Achievement Award in honor of his contributions to community banking and in particular to educating future bankers. Lastly, I want to recap some of the interesting and useful information that we learned from a panel of regulators who graciously took the time to come answer questions.

Last week, I wrote a post about how bank regulators determine when a banking practice is “unsafe and unsound.” As I explained, the regulators exercise broad discretion in defining unsafe and unsound banking practices, sometimes without any prior guidance. To get a better understanding of how the regulators define unsafe and unsound practices, this post highlights some of the enforcement actions the OCC, FDIC, and Federal Reserve Board have pursued over the last year and a half.

As every banker knows, a bank and its officers and directors can face an enforcement action for engaging in “unsafe or unsound banking practices.” This is true for financial institutions of all types and sizes, whether regulated by the OCC, FDIC, or Federal Reserve. The consequences of a finding that a bank has engaged in unsafe or unsound practices can be disastrous, ranging from a supervisory consent order to a cease and desist order and a civil money penalty. Despite these serious consequences, the phrase “unsafe and unsound banking practice” is not defined in the federal regulations. So what exactly is an “unsafe or unsound banking practice”?

Bank regulators have broad authority to impose civil money penalties (CMPs) against banks or institution-affiliated parties (IAPs) for violations of laws, regulations, and other written conditions or agreements. The OCC recently updated its policy on CMPs to change the factors considered in assessing CMPs. The new policy signals that the agency may be ramping up its enforcement efforts in certain areas and also provides useful guidance on how to avoid and, if necessary, respond to a potential enforcement action involving the imposition of CMPs.

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This blog is a resource where community bankers can find timely information about legal issues affecting their business, including recent regulatory and enforcement issues. The author, Tyler Bexley, is a commercial litigator and regularly represents banks and their officers and directors in litigation, regulatory enforcement proceedings, and other commercial disputes. Read more